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Energy ETFs Rise on Schlumberger Earnings Beat

The recent surge in oil production and uptick in oil prices brought the energy ETF space back into the limelight. While Q2 earnings season has already kicked off, the oil earnings are yet to be released fully.

However, one sector behemoth, Schlumberger Ltd. (SLB - Free Report) , came out with sturdy numbers on July 19th, signaling that some ETFs having high exposure in this company can be considered by investors.

Schlumberger Earnings in Details

The world’s largest oilfield services provider put up a strong show in the second quarter of 2013 by reporting adjusted earnings of $1.15 per share (excluding special items), which beat the Zacks Consensus Estimate of $1.11 by four cents.

Also, the quarter’s results increased from $1.05 per share earned in the year-earlier quarter. Total revenue of $11.18 billion was up 8.1% from the year-earlier level of $10.34 billion and ahead of the Zacks Consensus Estimate of $11.11 billion. The company’s strong international exposure, focus on execution and integration capabilities led to the beat.

However, this was not surprising as Schlumberger had beaten estimates in three out of the last four quarters by a decent margin and met the estimate in the other, further adding to the market’s optimism. The picture becomes rosier as we look into Schlumberger’s overall outlook for 2013 which remained largely unchanged from prior projections.

The company remains unruffled despite global issues. Schlumberger’s optimism on rising rig count and customer activity will lead to increased international spending on exploration and production. Also, stepped-up activity in the U.S. Gulf of Mexico should bode well for the company.

The company also expects steady growth in key regions that include Sub-Sahara Africa, Russia, the Middle East, China and Australia. The oilfield services behemoth believes that strong leverage to the deepwater segment will help it to perform well over the coming years (read: Time to Buy Energy ETFs?).

Market Impact

Quite expectedly, the company’s strong earnings had a positive impact on the sector, as SLB shares were up on the day. Shares went up by close to 5.5% as of July 19th – the day of the release, with volume of roughly three times a normal day.

This, in turn, pushed energy-driven benchmarks higher for the session. Further, the rise in oil prices thanks to weakening of dollar helped these benchmarks extend gains. While there are several ETFs having exposure in SLB that reaped returns on that day, we will discuss three funds with big allocations to SLB, and thus look to play off some positive trends in the oil field services corner of the market:

IEZ follows the Dow Jones U.S. Select Oil Equipment & Services Index, holding 50 stocks in its basket focusing solely on the energy world. The fund has a big cap tilt, though it has a relatively high beta of 1.50 (also read Crude Oil ETF Investing 101).

SLB currently has the top allocation with 21.89% of assets, while Halliburton Co (HAL - Free Report) holds the second spot with 10.06%. Generally when one stock accounts for as much as 21% of an ETF's weight, it can shift that ETF in either direction.

For our case, the move was definitely for the best, at least as of late. This ETF gained about 2.0% in Friday trading and on a year-to-date time frame, it returned about 21.1%.

OIH tracks the Market Vectors US Listed Oil Services 25 Index. The index includes 25 stocks of the largest publicly traded companies engaged in the oil services business. OIH devotes as much as 21.27% weight to SLB followed by 8.31% in HAL.

The fund was up by about 1.8% on the day, and returned about 20.27% over the year-to-date frame.

Large exposure in such well-performing companies like SLB and HAL clearly explain why these products experienced some gains of late (Read: Behind the Rebound in Energy ETFs).

The most popular energy ETF on the market, XLE tracks the S&P Energy Select Sector holding 45 stocks in its portfolio in which SLB takes the third spot with 6.60% weight. Its first two places are occupied by Exxon Mobil (17.18%) and Chevron (15.09%). The fund added about 1.4% on the day, and 17.22% on a year-to-date frame.

Bottom Line

The stellar performance by Schlumberger last week signals that resurgence in the energy sector is on its way. Rising U.S. oil production, greater energy conservation and the recent weakness in dollar against other world currencies will likely set the tone for energy ETFs in the rest of 2013 (Read: Time for This Top Ranked Energy ETF?).

Given this, a number of energy ETFs surged to close out the week. We are now awaiting the releases of the remaining bellwethers (like Halliburton, Exxon Mobil and Chevron) to figure out how the rest of the sector will perform in the coming days.

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